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The Pareto Principle
...is an economic term invented by an Italian economist Vilfredo Pareto in the 20th century. It is also called the 80-20 principle, meaning that 80% of effects come from 20% of the causes. In the book "The Tao of Warren Buffet" written...
...by Mary Buffett, one can read that 90% of Warren Buffett's returns came from just 10 stocks. One may believe that in a typical investor's career, out of the 50-100 lifetime investments, probably less than 20 or so would end up accounting for most of the gains.
A few investments you make will do the heavy lifting for the whole portfolio for 15-25 years, while others will be average, and a few will fail outright.
More specific definition: The Pareto Principle is an economic term invented by an Italian economist Vilfredo Pareto in the 20th century. It is also called the 80-20 principle, meaning that 80% of effects come from 20% of the causes. Vilfredo observed that 80% of the land in Italy is owned by 20% of the people. The ideas behind this principle are wide ranging in multiple fields, including investing.
Regarding "Investing": Even if you purchased stakes in 100 dividend paying stocks today, chances are that less than one quarter of those would account for majority of the gains in 15-25 years. This is because things change, companies merge, get acquired, go bankrupt and only a few prosper. But those who continue riding a big trend and manage to expand their operations by steady reinvestment into the business could deliver outstanding returns to their shareholders, which could lift up total portfolio returns substantially.
It is also interesting to think about the returns of Ben Graham, the father of value investing, who ran his Graham-Newman partnership between 1936-1956. Incidentally, his largest gains came from GEICO, which he simply bought and held on to for decades. Actually, the amount of profits from GEICO exceeded profits made from his active value investing.
The reason one should state this example is that despite all analytic models for identifying promising investments, a large part of the outcome could be the result of luck. Therefore, a dividend investor could be very patient with a company, and (may) hold it for decades....
